I buy options for the need of leverage and downside protection on per trade basis. Nothing beats buying calls outright if you see 70% probability of moving up for the span of coming few days, with limited loss contribute to the overall portfolio if such trade fails.
Option Trading is a GREAT Business. Buying and Selling and pocketing the difference. I started out years ago buying put options for downside protection; Later I gravitated to Writing Covered Calls - a nice income earner but I couldn't stomach the stocks losing value. Then I turned to using LEAPS as a surrogate for Stocks. That was where I figured I should have been all along:- Instead of Buying Stocks on Margin and paying interest I can buy Calls and get more leverage than on stocks , and I don't have to pay interest. I write Calls now .. using the same formula as I did when I covered holding stocks. My covered call target return earnings per month was 4% - now still aiming at the same target but buying LEAPS instead the monthly Call Writing Return is more than 12% on average. I have also figured out how to select strike prices so that I am actually prepared to write off the cost of the LEAPS and pocket up to 150% per 6 months. Annualised the return is even higher - as I reinvest the income earned and then write calls on an increasing capital - so compounding makes the result astronomical. Unfortunately it took me years to find this path. So if you are wondering why trade options ... only one reason ... FOR THE MONEY!
Here is my take on options: Yes I play options for making money ulitmate objective. But there are lot more reasons to options trading. Options are such a wonderful investment tool that you create strategies for up market, down market or sideways market. Once understood, you can very well design your own strategies and pocket wonderful gains months after month. However, if one doesn't understand options and how greeks works, then option trading may be disaster about to strike. It's one of the investment tools available to retail investors. I have been in the stock markets (especiall US, Japanese and Singapore markets) for the past 8-10 years and been through bull/bears cycles, etc and over a period of time have learned the importance of asset allocation. I think one should have an investment plan and investment based on his/her assett allocation visions. For instance, for small capital option trading maybe great but as your portfolio may become bigger and bigger one may want to add property, gold, etc. Net, I think, once understood, option plays a vital role in "accelerating" one's investment returns. Cheers and profitable trading, OptionPundit www.OptionPundit.net
I have been trading for 13 years and have traded almost exclusively in options for the past 4 of those years. I first became interested in options when I took a year to study how casinos make money. While the casinos always have the statistical edge, there are some games in which a skilled player can narrow the casino advantage to less than .05%. Granted, there are not that many skilled players in the general population base. But even if there were, casinos would still do well. I observed that there were no clocks on the walls, very few windows and the casino spares no expense to make the gambler comfortable. Obviously, they want the gambler to stay as long as possible. A gambler may win big, but given enough time, he/she will give it all back (kind sound like trading?). I later came to understand that I was seeing time decay (theta) in action. Selling options offered a natural application of this concept to trading. Now I am the casino. Because time decay works for me, I can now trade non-directionally, because I will make money despite the movement in the market. Time decay and its direct application through the selling of options has enabled me to make the market my partner instead of my opponent. I wish you all continued success in your trading! Daryl
Because of the multi-dimensional aspects of options. You can trade: direction, spreads, delta/gamma neutral, volatility, gamma scalp, sell premium, run a book, etc, all with limited risk known at the time of trade entry. It is also easier to write a business plan for trading options. Instead of it being a 50/50 proposition when trading the underlying directionally (from a purely probability point of view), options gives the other side of the trade that many more ways to get it "wrong." Also, options can slow down the underlying, something that is often important for many that don't have the personality or the mentality of thinking fast on their feet trading the underlying. Finally, the leverage is great, at the same time with limited risk. Nearly a perfect trading vehicle for the individual retail trader. nitro PS One desirable bullet point for me is that options trading is greatly aided by the computer and good [custom] software.
I trade options instead of stocks because I don't believe that stocks have any value and I like the downside protection of options. To me a stock is just a piece of paper with no real practical value. Okay, I might say stocks that pay a good dividend have real practical value, but all the other stocks are just smoke an mirrors. Ask yourself, what benefit do I get from buying stocks. The only real answer is that a greater fool may pay more. Alright I have to admit that maybe that reason is truly practical, but somehow I need more. So I use options to limit the downside. Of course the upside profit is reduced due to the cost of the downside protection, but that way I can sleep at night. Lot's of good, smart people see stocks differently than me and they indeed may be right, but to me the emperor has no clothes. Don
Very well said Daryl, nitro and Don. I guess this very well sums-up how versatile option trading is. Profitable trading, OptionPundit www.OptionPundit.net